Saturday, July 02, 2016

Independence Day 2016

At the close of the Constitutional Convention of 1787, anxious Philadelphians reportedly gathered outside Independence Hall after the proceedings ended in order to learn what had been produced behind closed doors. A Mrs. Powel asked Benjamin Franklin, “Well, Doctor, what have we got, a republic or a monarchy?” Without any hesitation, Franklin responded, “A Republic, if you can keep it.”

Perhaps the story is apocryphal, but nonetheless it is a good one to have in mind on Independence Day.

Without doubt, Americans have faced far more trying times than those we face today. No need to recount them here. But during this election year, there is no doubt as well that many Americans are dissatisfied with the direction in which our country is headed and fearful about its future prospects. And very many – myself included – are dissatisfied with the choices we likely will have this election day to fill the highest office in the land.

The rule of law, the fabric that binds together our constitutional Republic seems strained. Take but this one prominent yet striking example: In 2014, President Obama rejected entreaties, as he had done many times before, to essentially rewrite the substance of the nation’s immigration laws through executive action. In doing so, he declared: “I am President. I am not king. I can’t do these things just by myself. We have a system of government that requires the Congress to work with the executive branch to make it happen.” Then, less than a year later, President Obama asserted authority to take executive action to do exactly what he previously had expressly declared he lacked authority to do. Just like an ancient English king – “just by myself” –exercising the royal prerogative.

What are we to make of such political maneuvering that smacks so much of an “ends justify the means” modus operandi or mentality?

In this environment, the rule of law is undermined. You can hear the echoes of Franklin’s admonition: “A Republic if you can keep it.”

More than any other single person, James Madison was responsible for the Constitution’s drafting. So, on Independence Day, it’s worth considering what this foremost Founder might think about our current state of affairs in the context of the constitutional Republic created at the 1787 Convention. A good starting point is Federalist No. 51, where Madison asked: “But what is government itself but the greatest of all reflections on human nature?” Madison supplied one answer to this famous rhetorical question immediately after asking it:

“If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary. In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself.”

In Federalist No. 10, Madison wrote darkly of the “ambition” of men, their “mutual animosities” and “unfriendly passions,” and, indeed, their propensity “to vex and oppress each other.” He recognized that both individuals and interests – or “factions” as he put – naturally would seek to gain the upper hand by aggrandizing their power. And relevant to this election year, Madison warned against “unworthy candidates” who practice “the vicious arts by which elections are too often carried.”

So Madison set about to devise a government that would take into account this understanding of human nature. To counteract the effects of faction and preserve popular government, he conceived a system of separate and diffused powers, a federalist system in which “ambition” would counteract “ambition.” Or, as he put it in Federalist No. 51, a plan “of supplying by opposite and rival interests, the defect of better motives. . . .”

But Madison understood that even though he and his Constitution-making colleagues had framed a government designed to provide the best opportunity for free institutions to survive the machinations of ambitious men, and even unworthy candidates, democracy’s survival ultimately depends on something more than the structural design laid out in a paper document. It depends as much on a shared understanding between our leaders and citizens that there are lines in our politics that should not be crossed, or else people will lose respect for the rule of law that undergirds the institutions created by the paper document.

Given Madison’s understanding of the dark side of human nature, what basis is there to hope that prudential lines in our politics will not be crossed and the rule of law will be respected, especially in times when passions run high? Madison rested his hopes on what he perceived to be a duality in our natures, the existence of a noble side to rise above, if need be, the dark side.  Thus, shortly after he wrote about the unfriendly passions and unbridled ambitions that drive men, he wrote in The Federalist No. 55:

“[S]o there are other qualities in human nature which justify a certain portion of esteem and confidence. Republican government presupposes the existence of these qualities in a higher degree than any other form. Were the pictures which have been drawn by the political jealously of some among us faithful likenesses of the human character, the inference would be that there is not sufficient virtue among men for self-government. . . .”

Along with the diffusion of powers built into the Constitution’s structure, it was Madison’s trust in what is sometimes called “republican virtue” (note the small r) upon which he rested his hopes. Back home in Virginia urging ratification of the proposed Constitution, he again emphasized republican virtue:

“I go on this great republican principle: that the people will have virtue and intelligence to select men of virtue and intelligence. . . . No theoretical checks, no form of government, can render us secure. To suppose that any form of government will secure liberty or happiness without virtue in the people is a chimerical idea.”

On this Independence Day, it’s worth taking time to reflect on Benjamin Franklin’s admonition: “A Republic, if you can keep it.” To keep it, we must demand that our leaders act with honesty, prudence, responsibility, and respect for the rule of law – in other words, with republican virtue.

And we must demand as much of ourselves as well.
PS – Best wishes from the Free State Foundation family to you and yours for a safe and happy Independence Day!


PPS – My previous Independence Day messages are here: 2007, 2008, 2009, 2010, 2011, 2012, 2013,  2014, and 2015.  

Thursday, June 30, 2016

TPP Is Beneficial for Consumers and Entrepreneurs around the Globe

The Cato Institute held an event today releasing an abstract of a forthcoming paper entitled “Should Free Traders Support the Trans-Pacific Partnership (TPP)?” Yes, free traders should support TPP and so should Congress!
TPP would expand global trade by eliminating roughly 18,000 tariffs that member countries have imposed on imports from the United States, lifting millions of people out of poverty around the world. By removing these trade barriers and others imposed by the United States, TPP would allow consumers and entrepreneurs in all member countries to enjoy more economic activity and lower prices than what the status quo offers.
From an intellectual property perspective, TPP would establish strong protections of IP rights in member countries, allowing artists and entrepreneurs around the globe to earn a return on their creative works and the labor that makes them possible. U.S leadership regarding strong IP rights protections will incentivize more investment, innovation, and economic growth at home and abroad.
See my July 2015 blog on how multilateral trade agreements create global IP protections.

Wednesday, June 22, 2016

Maryland Should Improve Its Fiscal Scorecard

On June 1, 2016, the Mercatus Center at George Mason University released its 2016 edition of “Ranking the States by Fiscal Condition,” which analyzes each U.S. state’s financial health based on short- and long-term debt and other key fiscal obligations, such as unfunded pen­sions and healthcare benefits.
Despite recent news that Maryland received positive bond ratings, the state nevertheless ranks 41st (out of 51 including Puerto Rico) in overall fiscal solvency in the new Mercatus Center study, falling four spots from 37th in 2015. In the study, fiscal solvency breaks down into five categories:
  • Cash solvency. Does Maryland have enough cash on hand to cover its short-term bills? Compared to other states, Maryland is cash insolvent, ranking 43rd out of 51 and falling four spots from 39th in 2015.
  • Budget solvency. Can Maryland cover its fiscal year spending with current revenues? No, Maryland revenues cover 98% of expenses. This ranks Maryland 46th in the country as opposed to 44th in 2015. 
  • Long-run solvency. Can Maryland meet its long-term spending commitments and will there be enough money to cushion it from economic shocks or other long-term fiscal risks? No, Maryland’s net asset ratio is -0.19 and for the second year in a row Maryland ranks 43rd in long-run solvency.
  • Service-level solvency. How much “fiscal slack” does Maryland have to increase spending if citizens demand more services? Maryland ranks in the top half of U.S. states at 16. But this is not an improvement from 2015 when Maryland was ranked 11th.
  • Trust-fund solvency. How much debt does Maryland have and how large are its unfunded pension and healthcare liabilities? Fortunately, Maryland ranks 18th, which is only a slight decrease from 2015 when it was ranked 17th.

Notably, Maryland’s unfunded pension liability is below the national average and its funded ratio is 100%. This means the value of the state’s assets are greater than the value of the state’s pension obligations. In fact, commendably, Maryland is the only state with a funded ratio of 100%. The national average is 74%.
But when it comes to state spending more generally, Maryland’s total primary debt per capita is $2,880, while the national average is only $2,144. Maryland’s ratio of debt to state personal income is below the national average of 6.0% at 5.3%. In other words, Maryland does not have a revenue problem; it has a spending problem!
A short-term plan for fixing Maryland’s fiscal health should go hand-in-hand with Governor Hogan’s reformist goals when he first took office. By reducing tax and regulatory burdens, as FSF President Randolph May and I discussed in a January 2016 Perspectives from FSF Scholars, Maryland will attract more economic activity that has been migrating over state lines for years. Creating an economy of “permissionless innovation” will incentivize entrepreneurs to open up shop in Maryland. This is the path to improving Maryland’s fiscal scorecard.

Tuesday, June 21, 2016

Global Counterfeiting: Its Extent and Adverse Impact

On June 20, 2016, the Global IP Center (GIPC) released a new study entitled “Measuring the Magnitude of Global Counterfeiting.” The study analyzes the impact of counterfeiting of products on the 38 countries included in the 2016 GIPC International IP Index. See this February 2016 Free State Foundation blog explaining why the International Index is a useful tool for assessing the level of IP rights protections.
The study includes the following key findings:
  • ·      China alone is estimated to be the source for more than 70% of global physical trade-related counterfeiting, amounting to more than $285 billion. Physical counterfeiting accounts for the equivalent of 12.5% of China’s exports of goods and over 1.5% of its GDP. China and Hong Kong together are estimated as the source for 86% of global physical counterfeiting, which translates into $396.5 billion worth of counterfeit goods each year.


  • ·      Besides China and Hong Kong, the remaining countries in the sample account for 85% of world trade but account for 8.76% of global physical counterfeiting.


  • ·      Although data published by customs authorities is lacking, the value of counterfeit goods seized and reported by customs authorities today from the sample of 38 countries ($5.2 billion) represents slightly less than 2.5% of the global measure of physical counterfeiting of $461 billion.
Counterfeiting of products poses direct health and safety threats to consumers and also decreases innovation and economic activity because entrepreneurs have little incentive to create and develop goods in countries with weak IP rights protections. In 2013, physical counterfeiting cost consumers and entrepreneurs $461 billion in economic activity.

It is important that countries with weak IP rights protections, such as China and India, quickly strengthen their IP rights protections to discourage this illegal activity. Together, GIPC’s counterfeiting study and International IP Index are useful tools in helping policymakers around the world understand how their nations’ IP systems can be improved.
Strong IP rights protections promote creativity, innovation, and investment by artists and entrepreneurs. Consumers, ultimately, are the beneficiaries such creativity, innovation, and investment. The GIPC's new study, "Measuring the Magnitude of Global Counterfeiting," is a valuable resource that reinforces the need to fight counterfeiting."

Monday, June 20, 2016

Online Video Is Driving Internet Traffic Growth

On June 6, 2016, Cisco released its annual Visual Network Index (VNI): Forecast and Methodology, 2015-2020. Consistent with Cisco’s latest Mobile Data Traffic Update, which I highlighted in a February 2016 blog, this new index projects the global growth of Internet traffic and devices on all broadband technologies as opposed to just mobile.
Here are some of the key findings:
  • Global Internet traffic will increase nearly threefold over the next five years and will have increased nearly 100-fold from 2005 to 2020.
  • Smartphone traffic will exceed PC traffic by 2020. In 2015, PCs accounted for 53 percent of total Internet traffic, but by 2020 PCs will account for only 29 percent of traffic. Smartphones will account for 30 percent of total Internet traffic in 2020, up from 8 percent in 2015.
  • Traffic from wireless and mobile devices will comprise two-thirds of total Internet traffic by 2020.
  • Global Internet traffic in 2020 will be equivalent to 95 times the volume of the entire global Internet in 2005.
  • The number of devices connected to broadband networks will be three times as high as the global population in 2020. There will be 3.4 networked devices per capita by 2020, up from 2.2 networked devices per capita in 2015

The proliferation of video applications is by far the biggest driving force behind the increases in Internet traffic over the past several years and will continue to be for the next five years as connections increase and networks expand. On a global level, video traffic is projected to comprise 79 percent of Internet traffic in 2020. This is an increase of 16 percentage points from 2015 (63 percent).
While the United States certainly has been a leader in the amount of growth in connections and traffic, Cisco projects the rest of the world will have tremendous growth over the next five years. For the U.S. to continue to lead with respect to broadband deployment and innovation in broadband technologies, it is important that the FCC and state and local agencies remove unnecessary and burdensome regulatory barriers that stifle investment and innovation in broadband networks. Additionally, for continued growth in mobile broadband innovation, the FCC needs to allocate more licensed and unlicensed spectrum to meet the increasing consumer demand for advanced services and devices.

Another TAG Effort to Combat Online Piracy

On June 9, 2016, the Trustworthy Accountability Group (TAG) announced that advertising agencies Interpublic and Omnicom as well as Google, Go Daddy, and Bayer Consumer Health have joined its voluntary initiative that is aimed at preventing ad placement on websites which facilitate the distribution of pirated content and/or the illegal dissemination of counterfeit goods. (See this February 2015 blog for more on TAG.)

The addition of these companies and advertising agencies to TAG’s ongoing initiative should be helpful in reducing the $2.4 billion that legitimate content creators and entrepreneurs lose to pirated websites each year. In 2014, ad-supported piracy generated $204 million in aggregate revenue according the Digital Citizen’s Alliance. Without the use of Google’s search engine facilitating as much distribution of illegal content, piracy loss should be meaningfully reduced. Google’s support, if implemented properly, should mean YouTube users will not be able to generate ad-supported revenue from pirated content.

It is necessary to address, and diminish, piracy and content theft through voluntary initiatives like TAG's that help ensure that content creators, artists, innovators, and marketers can earn a return on their creative works!

Tuesday, June 14, 2016

FCC Should Maintain Safeguards to Curtail Spending for Risky USF Experiments

Whenever the FCC proposes to spend Universal Service money, it is important to remember that the subsidies come out of consumers' pockets. In 2015 alone, USF spending totaled $8.35 billion dollars. The Commission has an obligation to consumers to ensure that USF money is spent wisely. Dollars collected from consumers should not be wasted or risked on untried bureaucratic pet projects.

FSF President Randolph May and I have previously raised concerns about the way the FCC's "rural broadband experiments" are run – including funding rural electric co-ops' and other entities' entry into the broadband business to the tune of $40 million dollars. It's not the FCC's job to artificially create and prop up new business competitors through subsidies. And capitalizing entities with no established operations or experience in the competitive broadband market risks wasting USF dollars collected from consumers.

At the very least, "Strong Safeguards of Scarce Funds Should Govern FCC Broadband Experiments." In a prior blog post, I urged the FCC to maintain its bank-issued letters of credit (LOC) requirements before distributing rural broadband experiment money. Requiring recipients to obtain LOCs from banks helps ensure that disbursed dollars will be returned if recipients fail to meet build-out and service obligations.

According to reports in Telecompetitor, some entities remain unable to obtain LOCs and therefore have not received rural broadband experiment money. This inability comes despite the fact that orders issued by the Commission this spring have loosened LOC requirements.

In other words, it looks like some proposed rural broadband experiments are delayed or won't happen because those would-be recipients of USF money still can't get banks to give them LOCs. But this shows the sensibility of requiring LOCs, not of relaxing the standards. If financial institutions in the business of lending money won't risk giving LOCs to entities participating in rural broadband experiments, why should we want money collected from consumers to be thrown at such risky ventures?

In and of themselves, these rural broadband experiments are problematic on FCC institutional and financial responsibility grounds. But the Commission may not be able to undo what's already been done.

Going forward, however, the Commission ought to retain its Letter of Credit protections. To loosen them further will risk dissipating funds collected from consumers to fund an already excessive USF tax.